World oil production resumed the slowdown again in 2016 for the first time in the last three years, thus indicating the possibility of a slow but stable recovery in oil prices. China, being a large but far from the only consumer, increased demand for black gold by 3% y/y in 2016. IEA expects an increase of 8% in the world’s oil demand by 2021. Negativity in respect to the prospects of the oil market reigning in the markets since 2015, first of all hit the profitability of oil and gas companies, immediately affecting the value of their shares. Among few companies that demonstrated relative resistance to the fall of oil market, we highlight Lukoil, which shares, in our opinion, are fairly attractive taking into account the expected positive dynamic on oil prices. Our 12M target price is RUB3 381/share and we recommend “Buy” the shares of Lukoil with potential growth of 19%.
Lukoil is one of the largest integrated oil and gas companies in the world. Lukoil accounts for more than 2% of all international and 17% of all Russian oil production. Lukoil has a full production cycle, providing a whole range of activities from geological prospecting to marketing finished products to end users. The main operating segments of the Company are Exploration and Production, as well as Refining, Trading and Sales.
2016 results. EBIT in 2016 amounted to RUB419bn, a decrease of 10% y/y. The EBITDA decreased by 11% to 730bn rubles – an acceptable level by our estimation, considering the reduction in the average price of oil by 16% y/y. The margin of net profit decreased from 5.1% in 2015 to 4.0% in 2016. Despite this, the Company paid generous dividends for the year.
Focus on dividends. Last October the Board of Directors of Lukoil approved a new dividend policy based on the prioritization of dividend payments in the allocation of cash flows, which requires the Company to direct at least 25% of net profit to dividends and in order to raise the dividend annually by no less than the level of ruble inflation. According to our forecasts, following the results of 2017, the Company will be able to adhere to the adopted dividend policy. Moreover, according to our calculations, cash flows in 2017 allow the Company to increase the dividend payout ratio to 40% of net profit.
Low debt load. The Company has non-convertible bonds in US dollars with a weighted average interest rate of 6.06% and maturities from 2017 to 2028. As of the end of 2016, the ratio of net debt to EBITDA decreased to 0.58x (0.71x in 2015). According to our calculations, Net debt/EBITDA should not exceed 0.7x in 2017-2021. Taking into account the planned increase in oil prices, we believe that the Company will not have to raise additional loans in 2017-2022.
12M TP 3,381/Share, BUY recommendation. In our opinion, the gradual stabilization of oil prices, coupled with the build-up of export potential, will contribute to a steady increase in the price of its shares. Based on the consensus forecast of oil prices, we estimate the fair value of one share of Lukoil to be RUB3 381 and recommend to "Buy".